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Macroeconomics Policy And Practice 2nd Edition Frederic Mishkin - Solutions

Why does the divine coincidence simplify the job of policy making? In what situations will it prevail? Why?
Summarize the main points of disagreement in the debate between activists and nonactivists.
Describe the five time lags involved in implementing stabilization policy.
How does the Taylor rule relate to the monetary policy curve?
Would it be a good idea for monetary policy makers to set the federal funds rate solely using the Taylor rule?
Explain the processes of cost-push and demand-pull inflation. How do macroeconomists distinguish between the two?
According to the Reserve Bank of New Zealand Act of 1989 (section 8): “The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.”a) Do you think that this statement
The recent debate about healthcare reform in the United States included arguments about how the proposed reform might affect the efficiency of the U.S. economy. Based on the aggregate demand and supply analysis, do you think that a more or less efficient economy is an important issue in this
The following table shows the inflation rate and output level for four consecutive periods in a given economy. In period 1, the economy is at its long-run equilibrium (i.e., the inflation rate equals its target and output equals potential output). In period 2, there is a temporary supply shock
The following panels describe two different short-run aggregate supply curves. In which situation is the case for nonactivist policy stronger?Explain why. (a) AS Inflation Rate, AD Aggregate Output, Y Inflation Rate, (b) LRAS AS AD Aggregate Output, Y
Assume that policy makers are using the Taylor rule as a basis for policy changes, as specified in Equation 1.Under each of the following scenarios, show how the real interest rate, output, and inflation behave in both the short and long run. Use an IS graph and the AD/AS graph, and show the Taylor
The following table shows unemployment and inflation rates for Canada during the 1972–1982 period:a) Plot Canada’s unemployment rates during this period. On the same graph, draw a horizontal line at 7.3%, representing Canada’s estimated natural rate of unemployment.b) Considering the graph,
The Taylor rule suggests that the policy rate target should be increased when the output gap is positive. Do you think the Taylor rule encourages or discourages demand-pull inflation?Which might be a limitation of the Taylor rule with respect to demand-pull inflation?
On January 29, 2013, the Federal Reserve released a special statement that clarified its goals of “price stability” and “maximum employment.” Specifically, it stated that “the Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the units setting to “Percent Change From Year
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), real GDP (GDPC1), an estimate of potential GDP (GDPPOT), and the federal funds rate (DFF). For the price index, adjust the units setting to “Percent Change From Year
What role does the financial system play in promoting economic growth?
How does direct finance differ from indirect finance? Which form of finance is more important?
What is asymmetric information? What two asymmetric information problems hinder the operation of the financial system?
Why are asymmetric information problems particularly challenging in developing countries?What does this imply about the importance of financial intermediation and the role of banks in these countries?
Why do governments provide safety nets for bank depositors, and what are their consequences?
What are the benefits of financial deepening?
Suppose a firm has a great idea: overnight shipping. This idea will decrease costs for many businesses and will therefore result in a more efficient economy. If the entrepreneurs who create this concept cannot get funds to put their idea to work, what do you think the consequences will be for the
Suppose a given country encourages its citizens to save 20% of their income and then allocates these funds through governmentowned financial intermediaries. As a result, many government officials get mortgages to buy expensive houses (and often default on their payments). Do you think funds were
Identify the type of asymmetric information problem described in each of the following scenarios:a) A loan officer requests information about your work and credit history before approving your car loan application.b) The same loan officer explains that there will be a lien placed on your car title
Financial regulators have been working to improve transparency and reduce risk in the derivatives market. How do you think increased transparency will affect financial intermediaries that trade derivatives? How do you think it will affect the overall performance of the financial system?
One of the main characteristics of financial deepening is that more individuals participate in the financial system: more people open checking and saving accounts, and more firms rely on financial intermediaries as a source of funds. Comment on the effect of financial deepening on a central
Microcredit programs (i.e., very small loans issued to the extremely poor) usually target a group of women and assign funds to them under the condition that decisions about the use of funds are made by all women in the group. How do you think this procedure will help solve asymmetric information
Go to the St. Louis Federal Reserve FRED database, and find data on the three-month U.S. Treasury note (TB3MS), the three-month AA nonfinancial commercial paper rate (CPN3M), the three-month AA financial commercial rate (CPF3M), and the St. Louis Fed financial stress index (STLFSI). Use the
Go to the St. Louis Federal Reserve FRED database, and find data on the St. Louis Fed financial stress index (STLFSI), the percent value of loans collateralized for commercial and industrial loans (ESAXDBNQ), and the net percentage of loan officers reporting tighter credit standards (DRTSCILM). Use
The Heritage Index, published yearly by the Heritage Foundation, provides a comprehensive numerical measure of overall economic freedom for countries, with specific indicators reflecting the overall quality of financial markets through two indicators: financial freedom and investment freedom(for
Why is a financial crisis likely to lead to a contraction in economic activity?
Describe the three factors that commonly initiate financial crises, and explain how each one contributes to a crisis
What causes bank panics and why do they worsen financial crises?
Why does debt deflation make financial crises worse?
How did financial innovations in mortgage markets contribute to the 2007–2009 financial crisis?
What principal-agent problems resulted from the originate-to-distribute mortgage lending model?
What are the two types of asset-price bubbles?Which type poses a bigger threat to the financial system? Why?
How should central banks respond to asset-price bubbles?
Suppose you are about to buy a car and ask to see a vehicle history report to check on previous accidents or problems reported for that car. When you are told that this information is not available, you decide not to buy the car.a) Do you think this example illustrates an adverse selection or moral
The following figure, from the Federal Reserve Monetary Policy Report to the Congress (July 21, 2009), shows the gross issuance of mortgage backed securities (MBS) in the United States from 2007 to the second quarter of 2009.Comment on the drastic changes in the gross issuance of MBS in the United
As the effects of the 2007–2009 financial crisis became more pervasive, legislators and policy makers debated about the role played by the Federal Reserve as a regulatory agency. While the Federal Reserve argued for more regulatory oversight of the financial system, some policy makers wanted to
According to the FDIC, thirty banks failed or were assisted during 2008: six were based in California, two in Florida, and five in Nevada. The New York Times reported in 2007 that Nevada (–36.1%), Florida 1-30.8%2, and California (–21.3%) were among the top five states in which home sales
The following figure, from the Federal Reserve Monetary Policy Report to the Congress (July 21, 2009), shows mortgage delinquency rates from 2001 to 2009 in the United States.a) Explain why mortgage delinquency rates were higher for subprime mortgages.b) Explain why adjustable rate mortgages
According to the Federal Reserve Act of 1913(Section 13.3), “In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, […] may authorize any Federal Reserve bank, during such periods as the said board may determine, […] to discount for any individual,
Critics of the Federal Reserve in 2013 warned that the Federal Reserve’s commitment to keeping the federal funds rate near zero for an extended period of time might increase expected inflation. Explain why low levels of interest rates might fuel inflation expectations and what the Federal Reserve
Suppose a central bank identifies an increase in lending to the floral industry. In particular, many small businesses are borrowing aggressively to import tulips. As market participants observe a sharp increase in the price of tulips, the central bank considers its actions.a) Which type of price
Describe the effects on the economy if the Federal Reserve uses monetary policy to burst a wrongfully identified asset-price bubble.
One of the possible solutions to asset-price bubbles is the enforcement of macroprudential regulation. Financial intermediaries have an incentive to constantly look for profitable opportunities, which often implies the design of new financial instruments and even the circumvention of
Most legal systems assume that it is better not to incarcerate a guilty individual than to incarcerate an innocent person (i.e., if you are making a mistake, at least choose the lesser of the two). As central banks can potentially make a mistake when bursting asset-price bubbles, which mistake do
Go to the St. Louis Federal Reserve FRED database, and find data on house prices (SPCS20RSA), stock prices (SP500), a measure of the net wealth of households (TNWBSHNO), and personal consumption expenditures (PCEC). For all four measures, be sure to convert the frequency setting to “Quarterly.”
Go to the St. Louis Federal Reserve FRED database, and find data on corporate net worth of nonfinancial businesses (TNWMVBSNNCB), private domestic investment (GPDIC1), and a measure of financial frictions, the St. Louis Fed financial stress index (STLFSI). For all three measures, be sure to convert
Go to the St. Louis Federal Reserve FRED database, and find data on the three month U.S. Treasury note (TB3MS), the three-month AA nonfinancial commercial paper rate (CPN3M), the federal funds rate (FEDFUNDS), and the total volume of assets on the Federal Reserve’s balance sheet (WALCL). Convert
Identify the four main categories of government spending and give an example of each. What are the government’s four main revenue sources?
What is a budget deficit, and what are the two main ways in which the government can finance deficit spending? Which of these methods of financing deficits does the U.S.government most commonly use?
What factors have influenced the debt-to-GDP ratio in the United States since 1940?
What arguments should be considered in assessing the burden that government debt imposes on future generations?
How can government increase the quantity of aggregate output demanded by changing government spending and taxes? Why does the multiplier for spending changes differ from that for tax changes?
How does a supply-side analysis of the effects of a tax cut differ from one that focuses solely on aggregate demand?
Is balancing the budget a contractionary macroeconomic policy?
Why are fiscal multipliers higher when the policy rate has hit the floor of the zero lower bound?
What determines whether budget deficits will result in inflation in the long run?
How does the Ricardian equivalence view of the effects of tax cuts (and budget deficits) differ from the traditional view? What objections to the Ricardian equivalence view have been raised?
Suppose government purchases amount to $2.5 trillion, transfer payments amount to $1 trillion, net interest payments are $0.5 trillion, and tax revenue is valued at $3 trillion.a) Calculate the government deficit.b) Calculate the primary deficit.
Assume that Social Security tax rates remain constant but the number of employed people in the United States declines over time.a) Explain the effect of such a scenario on the size of contributions for social insurance and the government deficit in the United States.b) Assume now that employment
The definition of the government deficit is a matter of debate. What would be the effect on the measurement of the government deficit if one considered Social Security taxes a “forced loan to the government” and benefit payments (e.g., Medicare, Social Security benefits, etc.) a “repayment of
In recent years, the United States has experienced a sharp increase in obesity rates (in particular amongst teenagers), which is considered to increase the probability of chronic diseases like diabetes. Even if the dependency ratio is constant, what would be the effect of such a trend on the size
As announced by the Obama administration, part of the 2009 fiscal stimulus package was directed to making broadband Internet access available to most Americans.a) Should this plan be considered government consumption or government investment?b) Describe the effect of such expenditures on the
Concerns about the ability of the U.S. government to finance its own budget deficit might lead to higher interest rates on U.S Treasury securities.a) Explain the effect of higher interest rates on Treasury securities on the government deficit.b) What would be the long run effect of distrust in the
Assume that the expenditure and tax multipliers can be estimated at 0.75 and 0.5, respectively.a) Would you recommend expansionary fiscal policy based on tax cuts or increased government expenditures?b) Suppose there is substantial evidence that supports the hypothesis of a crowding-out effect in
A government committed to long-run fiscal discipline (i.e., low or zero budget deficits) usually conducts contractionary fiscal policy at some point to reduce the government deficit. If that action is interpreted as a commitment to long-run fiscal discipline,a) describe the effects on autonomous
Use an IS graph, an MP graph, and an AD/AS graph to show the effects of a decrease in taxes on short-run output in the two cases described in parts (a) and (b). Assume that the tax decrease is the same size in both cases and that the economy starts out at the same level of output in each case.a)
What would happen to revenue from seignorage if the inflation rate was very high? check Equation 8 and assume a quickly rising price level. M/P = (M/P) (8)
Consider the effect of a tax cut (if government spending remains the same) in a country with an underdeveloped financial system.a) Assuming individuals are forward looking (i.e., the Ricardian equivalence argument holds), what do you think might happen to national saving in this case?b) How do you
Go to the St. Louis Federal Reserve FRED database, and find data on the total government debt as a percentage of GDP (GFDEGDQ188S) and gross domestic product (GDP).a) Report the most current available debt to-GDP ratio, and the ratio one year prior and five years prior. Based on the entire
Go to the St. Louis Federal Reserve FRED database, and find data on the total public debt by the federal government (GFDEBTN) and the amount of debt held by foreign and international investors (FDHBFIN).Download the data into a spreadsheet, and make sure both data series are in the same units of
Go to the St. Louis Federal Reserve FRED database, and find data on the budget deficit (FYFSD), the amount of federal debt held by the public (FYGFDPUN), and the amount of federal debt held by the Federal Reserve (FDHBFRBN). Convert the two “debt held” series to “Annual” using the frequency
What is the foreign exchange market? Describe the two types of transactions that take place in this market.
Differentiate the nominal and real exchange rates between dollars and euros. Do the two exchange rates move together? Why is appreciation or depreciation of real exchange rates important?
How is the theory of purchasing power parity related to the law of one price? Why doesn’t PPP hold in the short run?
Why does the foreign exchange market move toward equilibrium when the foreign exchange rate for the dollar is either above or below its equilibrium value?
Identify three factors that might cause the exchange rate for a currency to rise.
What are the short-run effects on aggregate output and the inflation rate when the domestic currency appreciates or depreciates?
Why do central banks intervene in foreign exchange markets? How do these interventions affect their international reserves and exchange rates?
How do fixed, floating, and managed (dirty)float exchange rate regimes differ?
What happens in a fixed exchange rate regime if a currency is overvalued? What problem can this create?
What are the advantages and disadvantages of exchange-rate pegging?
Suppose a bottle of wine sells for $16 in California and for €10 in France. Assuming a nominal exchange rate of 0.75 euro per dollar,a) calculate the real exchange rate between U.S. wine and French wine.b) calculate the real exchange rate between U.S. wine and French wine if the domestic price of
A Starbucks coffee sells for 10 yuan in Beijing, China, and for $2 in Chicago.a) Calculate the nominal exchange rate if the law of one price holds.b) Assume that the nominal exchange rate is currently 7 yuan per dollar. What would the purchasing power parity theory predict about the future value of
In each of the following examples, the law of one price does not hold (i.e., at current nominal exchange rates, the prices of these goods or services are not the same). For each case, explain what prevents the law of one price from holding.a) A ton of sugar in the United States and a ton of sugar
On June 19, 2013, following the FOMC’s regular policy meeting, the Chair of the FOMC made remarks during a press conference that were widely interpreted in financial markets to mean that the Fed might begin reducing the size of its $85 billion in monthly asset purchases sooner than expected.a)
The following table shows the nominal exchange rate between the U.S. dollar and the euro (U.S. dollars per euro) at different points in time.a) Plot the nominal exchange rate, and determine whether the U.S. dollar has been appreciating or depreciating with respect to the euro during this period.
Suppose the Federal Reserve cannot convince the public of its commitment to fighting inflation in the United States in the near future.a) What would be the effect on the expected appreciation of the U.S. dollar?b) What would be the effect on the spot exchange rate for the U.S. dollar? Explain your
Brazil has announced the discovery of huge oil reserves that could potentially transform the country into a big exporter of oil.a) What would be the effect of the increase in revenues from oil exports on Brazil’s exchange rate?b) How would this affect other Brazilian exports? Is this a desirable
The following T-account (in billions of dollars)depicts an intervention by the Federal Reserve in the foreign exchange market:a) Did the Federal Reserve buy or sell U.S. dollars?b) What is the effect of this intervention on the exchange rate? Assets Foreign Assets Liabilities + $5 Reserves + $5
Explain why a central bank might want to intervene in the foreign exchange market to prevent an excessive appreciation of its currency, even if it previously stated that it would allow its currency to respond to supply and demand conditions in the foreign exchange market.
Assume that a country has pegged the value of its currency to another country’s currency and that the anchor country increases its interest rate. Describe the effects on the following:a) The export sector of the pegging countryb) Households’ net worth if the pegging country is forced to devalue
Go to the St. Louis Federal Reserve FRED database, and find data on daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), Japanese yen (DEXJPUS), Chinese yuan (DEXCHUS), and Canadian dollar (DEXCAUS).a) Report the exchange rates for the most recent available day, and the day
Go to the St. Louis Federal Reserve FRED database and find data on the exchange rate of U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London, England, for £17,865 or in Boston, United States, for $23,495.a) Use the most recent exchange rate available to calculate the
Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also, find data on the daily three-month London Interbank Offer Rate (LIBOR) for the United States dollar (USD3MTD156N),

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